Chinese Yuan

In response to:
China's yuan set to weaken for six months:
Analysts forecast gradual depreciation as China grapples with global slump,
December 12, 2008

AFAIK, Chinese offered to buy a lot from us (I mean US) in return for greenbacks and T-bills they accumulated, but they were refused, as their main interests were around newest technologies and industrial equipment with potential military use which they cannot buy in a normal business fashion.

They were also expressing interest in a lot of assets in US, and Russians did so also, again, with negative result out of fear of too much foreign influence on US economy.

Yes, I know, with Japanese owning Hollywood, Saudi, Swedish, Germans and British owning significant sectors of our economy and London City still in charge of financial world, it does not make much sense, but at least those were considereed our allies since WW2 (especially Germans and Japanese). Communists did not won Cold War, but they are certainly willing to buy us in an ol' good capitalistic free market fashion.

Great Depression? Great Flood.

In response to The liquidity trap. Commentary: Financial engineering seems worse than the alternative by Jim Anderson - Dec 4, 2008

el000:
Liquidity trap of course exists, but in 30s one factor was absent, which is present today: huge amounts of live money pumped into the banks instead of bad debt and bad securities.

As such, they replace invetment tools in banks and hang there as investment (makes sense in deflation) but early or later banks will need to make these money grow, not just sit there in piles, and with financial market solutions shut down, what direction will they go?

For now, these money are hanging in investment mode like a dark cloud in the sky full of water. But any point of condensation or triggering event and the drought is over and they will start to rain on real economy, and then inflation will start. Not fun either, but the deflationary state of the economy is simply not stable this time.

Deflation during Great Depression was like drought resulted from no rain. With those clouds of money in our economy sky we are heading to the Great Flood instead. Of course, not today. A very good (and very interesting) question is when?

el000:

Translated to polite language, what you say means that trickle down economy (money flowing from rich to poor) does not work. Yes, I completely agree with you on that. Rich getting richer does not make economy work, otherwise there would be no 19th century overproduction crisises.

Giving money to banks is essentially making rich richer (as you said "BILLIONS FOR THE THIEVES, NO QUESTIONS ASK"). Now "thieves" have tons of greenbacks and sitting on them because deflation makes it sensible and liquidity trap is in place, Great Depression seems inevitable.

But consider such scenario: Obama tries to press on China to free Tibet and pushes Georgia into NATO. China and Russia are pissed off and sell a lot of greenbacks on international markets. Dollar plunges, because they still have tons of them. Your rich "thieves" scurry to save their money and selling dollars for euros, yens, franks, yuans, rubles... making dollar plunge even deeper and making it irreversible. With exchange rate crushed everything imported (that is nearly everything in your local Wal-Mart and gasoline) becomes more expensive. That's called inflation. At the same time our export becomes less expensive and more competitive. It will begin to make sense to produce here and export out there. Depending on how much dollar will fall, we may become destination for outsourcing instead of China. Especially, if we fix our education to continue having great workforce.

And "Free Tibet"/Georgia with panic on ForEx is just one scenario, there is a lot of other potential triggers around.

Of course, free market style as descibed here, it will really hurt too, and trickle-UP elements like infrastructure works or direct cheap credits from the government bypassing banks would soften it a lot. In the end, I am not saying that what's coming is better than Great Depression (although it could be, only complete idiots would not learn in a hundred years), I only say that the Great Depression scenario is not stable today.

US debt

Comments to "China's sovereign fund 'wary' of western banks. China Investment Corp. chief says he doesn't trust Western financials amid lack of clarity on outlook, effect of government policies"
(http://www.marketwatch.com/news/story/chinas-sovereign-fund-wary-western/story.aspx?guid=%7B5D3506A3%2DA5C5%2D4E21%2DA017%2D83DB4EC282E2%7D#comment1143283)

Dec 3-4, 2008

Leonidas
In order to finance our debt we need to sell assets to foreigners. If not financials then what? real estate? At the moment high dollar value is shrinking the export sector.

el000
Our debt in US dollars. Printing extra to pay for that debt would also make it cheaper and help to increase our export... if we would have any production to export, of course.

Leonidas
el000, don't you think that those who buy the debt are fully aware of any attempts to devalue it? They could be foreigners but not necessarily stupid.

el000
Leonidas, of course they are not stupid. Chinese invented paper money (or, more precisely, Chengiz-Khan after conquering China). The point is, they know well how to use paper money. In some sense better than our bankers.

They've got a lot of milage out of financing US debt: influence on US foreign (and not only foreign) policy, building their own industry/economy to incredible size while driving our industry into a ditch, using OUR companies to sell THEIR products worldwide... They never believed in the magic of the dollar in the first place, but skillfully used it for their advantage, and they got it.

Consider an example: a consumer buys a roll of toilet paper. Then he uses it. Did he lost its value? No, he's got value. And yes, he cannot resell that roll anymore, but that was expected. Chinese bought a lot of green toilet paper and they used it. They've got value. A lot of value.

Granted, as wise people they may not want to waste what's left and try to recycle it in a form of political influence on US policy.

There is also a chance that they will use that influence to prevent us from printing extra money, but that won't really work. With all trllions pumped into the systems by Feds and Paulson's 700+ billions coming, our investment heavens are soaked with dark clouds of money. They are already there. They don't result in inflation because they just hang in the sky for now. It's a matter of time and some triggering event to start raining and then it will flood the real economy.

... and stock market too. I am squeaking like Scrat in a nut heaven trying to decide which stocks to buy now and when exactly... Speaking of Noah's Arc...

Rescuing Big 3 automakers....

Marketwatch, November 24, 2008

I already mentioned it to another post, but I wonder if help to Big 3 may be provided as a low or zero interest federal loans to Americans to buy one of these three brands.

1. You have to be US citizen or legal permanent resident (verifiable by SSN) and live in US
2. You can buy one vehicle of Ford, GM or Chrysler of your choice
3. Price must be fixed to MSRP+$300-400 for the dealer (Big 3 can force their dealers to do so as part of the deal).
4. The vehicle must be certified made in USA
5. Credit is low or 0% interest with deferred payments.

I'd love that. For a difference I'll get something from my tax dollars even if in a form or credit.

Big 3 will get their money but in a more natural way, also market will tell who of them sucks more and pay appropritely. And the money will also stimulate local economies on the way. Also, haugty j**/Euro-brand lovers won't use it, so it will go to poorer states like MidWest or South where people still have to drive cars from 70s and 60s. That will help them and also ensure that these cars won't flood the market soon afterward -- because those people will really need these cars.

Mortgage lending and leveling risks

MarketWatch, Nov 25

I wonder if our whole mortgage industry is somewhat skewed in favor of banks. You see, in morgage all the risk is on the buyer and all the benefits are to the bank. The only risk bank is taking is buyer's bunkrupcy, which is all-or-none game for them. In a case of ARM the risk is even more overhanging on the buyer. But if we are in a free market, why such an asymmetric deal?

If reguilations would require banks to share the risk of falling house values with the buyer, and put on hold payments for "underwater" portion of the loans or even lose that portion, they (banks) would be much more careful giving our mortgages in a bloated market. And banks have analysts,experts, and they are not under pressure to close the deal to have a place for the family to live in. With such regulation housing speculation will become nearly impossible as banks control real influx of money to the market, and we would get to the old good real market prices with just normal inflation adjustments.

I wonder if I should write about it to my congressmen and senators... sounds like they will discuss the topic in the near future in DC.

MarketWatch, Nov 26

Speaking of fantasyland and risks, let's see. A lot of subprime rates were given to uneducated people who just did not know the real value of their house and what it means for them. You may say that they "need to learn", and they do so right now! They are getting their houses foreclosed, their finances in ruins... Anybody’s happy?

See, if you want a functional economy, you have to have a lot of janitors, cab drivers, etc. and they are uneducated, that's why they are janitors and cab drivers. So, you have uneducated masses on one side and greedy banks on another side. You cannot get rid of any, and together they've proved to be a combustible mix.

Now, uneducated masses pay for their errors. But I don't see banks paying for their errors -- they are getting bailed out. In fact, they are getting bailed out every 7-10 years for the last several decades. That's NOT a leveled field. And "masses learning their lesson" does not work. You have to put some breaks on another side too.

I did not borrow against inflated price of my house. I’ve got it for ~$250 and refinanced a couple of times only 30-years fixed to decrease monthly payments. I know it’s not worth half a mil, even though it still would sell for that right now. But despite my education and right choices, I am still caught in a bad economy because stupidity and greed of others met each other. And you are caught in it too! So, now it’s not about learning, it’s about macroeconomics. It’s about OUR SYSTEM HAVING WRONG BALANCE SOMEWHERE.

Uneducated people don't have education or knowledge to recognize the problem. Banks do. Banks can distinct value of the house and price in overheated market. Banks should not give $500K loan for $200K house only because current prices are up in a bubble market. What I propose is not putting all risks on the lender, but PUTTING ONE SPECIFIC RISK on the lender, which they neglected for decades with national disaster consequences. In a sense, it’s about banks learning their lesson.

And if that will be in place, it won’t result in higher interest rates, because no interest rate can counteract loss of value after the bubble burst. It will result with banks lending only real value of the house, not a bloated price tag. “Yeah, friend, you see, seller asks for 1.5 mil, but the house only worth $350K, so that’s max we can give you for it.” And because most money on real estate market comes from banks, it will prevent further real estate bubbles.

BTW, THANKS EVERYBODY FOR YOUR COMMENTS AND CIRTICISM, it really helps to clarify thoughts and polish the idea.

Thanks for comments to:

lnardozi, awesley, ab420, JustTrade, seetheforest, 6TANGO, DC26, and Ostriches.